Internet sales tax would create 'level playing field' for small businesses

CHARLESTON, W.Va. -- The West Virginia Center on Budget and Policy supports placing sales taxes on products that are purchased and delivered over the Internet to customers throughout the state.

Sales taxes of six percent assessed on digital goods could generate additional revenues between $1.9 million and $4.3 million a year for West Virginia, according to a new study by the National Center on Budget and Policy Priorities, based in Washington, D.C.

"Each year West Virginia loses millions because it does not tax Internet sales. Like most states, West Virginia taxes the in-store sales of physical books, movies, software and games," the West Virginia Center pointed out in a statement released last week.

"But when these products are delivered digitally over the Internet, sales taxes do not apply."

Ted Boettner, executive director of the West Virginia Center on Budget and Policy, said, "With looming cuts to child care and higher education, it makes no sense not to modernize our sales tax and treat all businesses, small and large, the same.

"Small businesses are an important part of our state's economy and they deserve a level playing field.

"Modernizing our sales tax to include more digital goods is a win, win situation. It makes our tax system more fair and brings in much needed revenue," Boettner said.

Michael Mazerov, a senior fellow at the national Center for Budget and Policy Priorities, just released a paper -- "States Should Embrace 21st Century Economy by Extending Sales Taxes to Digital Goods and Services."

"States are losing more and more revenue each year from a failure to require the payment of sales taxes when goods and services are sold and delivered online," Maserov writes.

Those products include computer software, books, movies, music and games.

Today, 45 states collect sales taxes. Yet only a few extend their sales taxes to products purchased and delivered over the Internet.

The failure to assess sales taxes on out-of-state businesses that market products over the Internet also puts local business owners at a disadvantage.

"In most cases, these tax exemptions exist not for any policy reason but rather because sales tax laws and regulations have not been updated to reflect the Internet age -- an oversight that is growing costlier every year," Maserov writes.

Nationally, state sales taxes collected on Internet sales could generate between $300 million and $837 million a year, Maserov estimates.

Individuals who avoid sales taxes by purchasing digital products online are more likely to come from upper-income households.

"Many lower-income households do not have home Internet access," Maserov points out. "Even if they do have Internet access, [they] are less likely to make online purchases."

In May 2011, 51 percent of adults living in households with incomes less than $30,000 -- which did have Internet access -- actually shopped online. But 90 percent of adults in homes with incomes above $70,000 did.

"Sales taxes already consume a larger share of the incomes of lower-income people than those who are better off; exempting digital goods and services forces lower-income households to shoulder an even larger share of sales tax collections," Maserov said.

Today, Hawaii, New Mexico and South Dakota tax almost all digital goods and services. Idaho, Utah and Washington have sales taxes that cover a broad variety of digital products and programs.

"States that have not yet extended their sales taxes to downloaded computer software, movies, music, books, and games should do so at the earliest opportunity.

"These products are almost perfect substitutes for their tangible counterparts, and it is unfair to both the buyers and sellers of the latter [tangible] products to only tax them," Maserov concludes.

The new Center on Budget and Policy Priorities study also suggests states could extend sales taxes to cover online sales and purchases of other digital products and services, such as: online magazines and newspapers, databases, and dating services.